Optimal Clean Energy R&D Investments Under Uncertainty

29 Pages Posted: 6 Apr 2017

See all articles by Giacomo Marangoni

Giacomo Marangoni

Fondazione Eni Enrico Mattei

Gauthier de Maere d'Aertrycke

Fondazione Eni Enrico Mattei

Valentina Bosetti

Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Date Written: March 15, 2017

Abstract

The availability of technology plays a major role in the feasibility and costs of climate policy. Nonetheless, technological change is highly uncertain and capital intensive, requiring risky efforts in research and development of clean energy technologies. In this paper, we introduce a two-track method that makes it possible to maintain the rich set of information produced by climate-economy models while introducing the dimension of uncertainty in innovation efforts, without succumbing to computation complexity. In particular, we solve the problem of an optimal R&D portfolio by employing Approximate Dynamic Programming, through multiple runs of an integrated assessment model (IAM) for the purpose of computing the value function, and expert elicitation data to quantify the relevant uncertainties. We exemplify the methodology with the problem of evaluating optimal near-term innovation investment portfolios in four key clean energy technologies (solar, biofuels, bioelectricity and personal electric vehicle batteries), taking into account the uncertainty surrounding the effectiveness of innovation to improve the performance of these technologies. We employ an IAM (WITCH) which has a fairly rich description of the energy technologies and experts’ beliefs on future costs for the above-mentioned technologies. Focusing on Europe and its short-term climate policy commitments, we find that batteries in personal transportation dominate the optimal public R&D portfolio. The resulting ranking across technologies is robust to changes in risk-aversion, R&D budget limitation and assumptions on crowding out of other investments. These results suggest an important upscaling of R&D efforts compared to the recent past.

Keywords: Energy, Innovation, Technological Change, Uncertainty, Climate Policy

JEL Classification: O30, O33, Q40, Q41, Q50, Q55

Suggested Citation

Marangoni, Giacomo and de Maere d'Aertrycke, Gauthier and Bosetti, Valentina, Optimal Clean Energy R&D Investments Under Uncertainty (March 15, 2017). FEEM Working Paper No. 16.2017. Available at SSRN: https://ssrn.com/abstract=2947610 or http://dx.doi.org/10.2139/ssrn.2947610

Giacomo Marangoni (Contact Author)

Fondazione Eni Enrico Mattei ( email )

C.so Magenta 63
Milano, 20123
Italy

Gauthier De Maere d'Aertrycke

Fondazione Eni Enrico Mattei ( email )

C.so Magenta 63
Milano, 20123
Italy

Valentina Bosetti

Bocconi University

Via Gobbi 5
Milan, 20136
Italy

CMCC - Euro Mediterranean Centre for Climate Change

via Augusto Imperatore, 16
Lecce, I-73100
Italy

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